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Buying Real Estate is Not Always a Good Investment

Most of the home-buying problems people have their roots in a common misconception about the real estate market. Ever since the 1980s, most people have viewed real estate as a wonderful investment. While that was true for a while, it’s no longer the case.

Real estate investmentHistorically, buying real estate has been as much an emotional as a financial decision. When you owned your own home you were literally king of your own castle. No absentee landlord could raise your rent, turn off the heat, or make you put up with a leaky roof. You could grow your own food and raise your own livestock, or you could put up a trampoline and basketball hoop for your kids. You could put up knotty pine paneling in your dining room and build a workshop in the basement. You were in control. Financially, you could deduct the interest on your mortgage, and rest assured that your home’s value would probably outpace inflation. If nothing else, paying a mortgage rather than rent was a form of enforced savings.

Things changed in the 1980s when the leading edge of the baby boom generation began entering the home-buying market. Because of post World War II prosperity, federally subsidized home loans, and the development of the middle-class suburb, many baby boomers grew up in homes owned by their parents, unlike previous generations. They wanted to buy homes similar to those they’d grown up in. But because there were so many baby boomers, the demand drove prices up. Houses purchased by a boomer’s parents in 1965 for $15,000 were selling in 1985 to a young boomer family for $150,000. The same demographic anomaly that forced home prices up kept salaries down in real terms. To afford to buy their parents’ home, boomer couples had to bring in two salaries and spend a higher share of their income on shelter.

Prices kept soaring throughout the 1980s as more and more baby boomers entered the market. Older boomers were able to buy and sell homes quickly, make a tidy profit off younger boomers, and use the money to buy an even larger home. But then at the end of the decade the tide turned. The number of buyers began to drop, demand slowed, and prices stagnated and then fell. The age of real estate as an investment was over. But not everyone has gotten the message.

Most people with real estate problems are still thinking as if it were the 1980s. It’s not. Today people should be buying a home they’re willing to stay in for a long portion of their lives. They should look at it as a spiritual and emotional purchase, as more of a quality-of-life issue than a financial issue.

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